Optimal Central Bank Conservatism and Monopoly Trade Unions

By Carsten Hefeker, Helge Berger, Ronnie Schlöb

March 1, 2002

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Carsten Hefeker, Helge Berger, and Ronnie Schlöb. Optimal Central Bank Conservatism and Monopoly Trade Unions, (USA: International Monetary Fund, 2002) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The "conservative central banker" has come under attack recently. On the basis of models in which there is explicit interaction between trade union behavior and monetary policy, it has been argued that if 'trade unions' are averse to inflation, welfare will be lower with a conservative than with a liberal central bank. We reframe this discussion in a standard trade union model. We show that the case against the conservative central banker rests exclusively on the assumption of a strictly nominal outside option (for instance, unemployment benefits) for the union. There is no welfare gain associated with making the central bank less conservative than society, however, if the outside option is in real terms. As the nominal components of the trade union's outside option are mainly public transfers, we also show that the conservative central banker is always optimal if the government can choose the level of nominal unemployment benefits as well as the degree of central bank conservatism.

Subject: Banking, Inflation, Labor unions, Options, Real wages

Keywords: Labor market, Monetary policy, Nominal wage, Price level, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/044
Stock No:

WPIEA0442002
ISBN:

9781451846423
ISSN:

1018-5941

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